Growth, structural change and technological capabilities Latin America in a comparative perspective

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Growth, Structural Change and

Technological Capabilities

Latin America in a Comparative Perspective

Mario CIMOLI

Marcio HOLLAND

Gabriel PORCILE

Annalisa PRIMI

Sebastiàn VERGARA

*ECLAC-United Nations, Santiago, Chile **Federal University of Uberlandia and CNPq, Brazil

***Federal University of Parana and CNPq, Brazil

L

L

E

_E

M

_M

Laboratory of Economics and Management

Sant’Anna School of Advanced Studies

Piazza Martiri della Libertà, 33 - 56127 PISA (Italy)

Tel. +39-050-883-343 Fax +39-050-883-344

Email: [email protected] Web Page: http://www.lem.sssup.it/

Growth, Structural Change and Technological Capabilities

Latin America in a Comparative Perspective

Mario Cimoli

Marcio Holland

Gabriel Porcile

Annalisa Primi

Sebastián Vergara

April 2006

Abstract

Countries differ in terms of technological capabilities and complexity of production structures.

According to that, countries may follow different development strategies: one based on

extracting rents from abundant endowments, such as labor or natural resources, and the other

focused on creating rents through intangibles, basically innovation and knowledge

accumulation. The present article studies international convergence and divergence, linking

structural change with trade and growth through a North South Ricardian model. The analysis

focuses on the asymmetries between Latin America and mature and catching up economies.

Empirical evidence supports that a shift in the composition of the production structure in favor

of R&D intensive sectors allows achieving higher rates of growth in the long term and

increases the capacity to respond to demand changes. A virtuous export-led growth requires

laggard countries to reduce the technological gap with respect to more advanced ones. Hence,

abundance of factor endowments requires to be matched with technological capabilities

development for countries to converge in the long term.

Key words: Latin America, Structural Change, Technological Capabilities, Growth JEL Classification: O30, O33

♣ _{This paper is based on Cimoli, M., Porcile. G., Primi, A. and Vergara S. (2005), “Cambio estructural, heterogeneidad} productiva y tecnología en América Latina”, and Holland, M. and Porcile G. (2005), “Brecha tecnológica y

crecimiento en América Latina”, published in “Heterogeneidad estructural, asimetrías tecnológicas y crecimiento en América Latina”, Cimoli M. (ed), CEPAL, BID, 2005. Corresponding author: Mario Cimoli, [email protected] * _{Division of Production, Productivity and Management, ECLAC-UN, United Nations-Economic Commission for}

Latin America and the Caribbean. The views expressed in this document are those of the authors and do not necessarily reflect the views of the Organization.

Introduction

The capability to promote structural change in order to profit from new technological

paradigms and demand growth is a critical determinant of a country relative economic

performance in the international arena. And, this is mostly true in open economies, where

products, production processes and sectors internationally emerge and disappear at a high pace.

Actually, the relationship between structural change and economic development

traces back to the analyses of the development theory pioneers. In the fifties, development

required the reallocation of production factors from low productivity to high productivity

sectors where increasing returns prevailed3, and hence industrialization was seen as the way

out from the “peripheral” condition. The manufacturing sector would allow increasing returns

to ensue and technological learning to develop; and an increasing participation of industry in

total value added would grant spillover effects, backward and forward linkages and

technological externalities, which in turn would accelerate capital accumulation and growth4.

Within this framework, production structure transformation would, gradually, lead to

a change in the international specialization pattern. Prebisch (1950;1981) emphasized that the

production structure of peripheral countries implied a much higher income elasticity of

demand for imports than their income elasticity of demand for exports, thus inducing recurrent

external imbalances in the those countries. Assuming low price elasticities of import and

export demand, the South would have to grow at lower rates than the North to avoid external

disequilibrium (Rodriguez, 1981). This implies divergence in income per capita between North

and South, which could only be avoided by a reorientation of the relative specialization.

This view on structural change and development has been enriched in the 1960s by

some new contributions in the technology and trade theory (Posner, 1961; Freeman, 1963;

Hirsch, 1965; Vernon, 1966). International asymmetries in technological capabilities started to

be regarded as main determinants of trade flows and specialization patterns, hence influencing

economic growth5. Knowledge and technology leave the free good domain and are converted

in oligopoly assets that confer a significant competitive advantage to those who innovate.

3 _{Hirschman, Prebisch, Rosenstein-Rodan, Gerschenkron, Chenery and Sirkin are some of the classical authors in the}

development theory. For a reviewof their contributions see Ray (1998, Chapter 5).

4 _{Recently, these “old" issues, such as as: externalities, indivisibilities, spillovers and increasing returns are evoked in}

the "new growth theories" (Grossman and Helpman, 1992; Krugman, 1991; Aghion and Howitt, 1998; Ray, 2000; Ros, 2000). Diversification in production structures and increasing returns in R&D intensive sectors explain sustained per capita income growth in the long term and structural change depends on the creation of new capital assets, increasing labor division and improvements in the quality of the industrial produce. At the same time, the innovation pace of the R&D intensive sectors sustains production structure diversification and increasing returns.

5 _{Freeman (1963) highlights the differences that determine the specialization pattern before and after the imitation}

This perspective is also the distinctive feature of the evolutionary school, which

emphasizes the role of technological change in shaping structural change and growth (Dosi et

al 1990). Economies that are able to absorb new technological paradigms and that transform

their production structure increasing the participation of R&D intensive sectors or production

stages will converge. Three relevant implications emerge from this approach.

First, the evolutionary theory predicts persistent asymmetries in production

capabilities. At any point in time two major testable conjectures can be drawn: (i) different

countries can be unequivocally ranked both according to the efficiency of their average

production techniques and, in the product space of the price-weighted performance, according

to the characteristics of their outputs, irrespectively of relative prices; (ii) there will be no

significant relationship between these gaps and international differences in the capital/output

ratios. The capability to develop new products and the capacities to imitate already existing

ones will be extremely skewed. Indeed, the international distribution of innovative capabilities

is at least as uneven as that regarding the production processes.

Second, development and industrialization are strictly linked to inter- and

intra--national diffusion of "superior" techniques. At any point in time there is likely to be only one

or at most very few "best practice" production techniques that correspond to the technological

frontier. In the case of developing economies, industrialization is thus closely associated with

the transfer, imitation and adaptation of established technologies from more advanced

economies. Capabilities of adopting and adapting technologies are, in turn, influenced by the

specific capabilities of each economy.

Third, evolutionarists emphasize the importance of the institutional dimension for

production and innovation development. Actually, at a micro level, technologies embedded in

particular institutions, the firms, whose characteristics, decision rules, capabilities, and

behaviors directly shape the pace and directions of technological advance. Within this

framework the concept of "national innovation system” ensues as a relevant dimension for

understanding the relative performance of countries in international competition (Cimoli and

Dosi 1995; Freeman, 1987; Nelson, 1993).

Actually, technological and institutional gaps and asymmetries can jointly reproduce

themselves over rather long spans of time, or, conversely, it might be precisely the institutional

and technological diversity among countries that may foster catching-up (and, in some rare

cases, leapfrogging) in innovative capabilities and per capita income. And, it is within this

evolutionary micro-theory that we are going to analyze the evolution of technological

capabilities, structural change and growth of Latin America in a comparative perspective.

The paper is organized in four sections. Section I develops a simple model of

convergence and divergence, based on Cimoli (1988) and Fagerberg (1988). Section II

discusses the transformation of the Latin America production structure in terms of

technological capabilities and international competitiveness, showing that the virtuous link

between exports and output growth requires a reduction in the technological gap with respect

to more advanced economies. On the basis of these analyses, section III identifies two types of

countries’ rent seeking strategies: one which exploits the opportunities offered by the relative

abundance of natural resources or labor and the other based on the capacity to extract rents

from technological capabilities. Section IV concludes.

1

A Model of Convergence and Divergence

Empirical evidence on international trade and convergence suggests that caution is needed

when exploring the impact of trade on the specialization pattern. In conventional models,

international trade is expected to contribute to convergence by inducing the adoption of new

technologies and by encouraging a more efficient allocation of resources (see for instance

Barro and Sala-i-Martín, 1994). Therefore, there should be a positive association between

openness and economic growth. But this perspective is challenged by that literature pointing

out that convergence and openness have not always gone hand by hand (Easterly, 2001;

Rodríguez and Rodrik, 2001). Convergence or divergence, in these cases may depend on

whether openness is complemented by local efforts of technological learning and on the

adoption of policies favoring a more dynamic specialization pattern (Cimoli and Correa, 2005;

Fagerberg, 1994; Hausmann and Rodrik, 2003; UNCTAD, 2003).

Within this framework, Ricardian trade models with a continuum of goods are powerful tools

for analyzing the role of technology in international trade; they bridge Keynesian (demand-led)

growth, the balance-of-payments constraint and technological and structural change. In these

models, countries specialize on the basis of the differences in labor productivity arising from

technological frontier show much higher productivity in high-tech, innovation-driven sectors

than laggard countries. At the same time, productivity differences will be lower in sectors in

which technology is already standardized and, consequently, the technological frontier moves

slowly. These considerations frame a setting where innovation dynamics and technology

diffusion in the international economy determine a country’s specialization pattern

In point of fact, Ricardian models results effective in studying convergence and

divergence amongst countries in the international economy. In effect, in a two country model,

one of which is the technological leader (North) and the other the follower (South), current

account equilibrium implies that the relative North-South income must be a function of the

number of goods that each country produces, i.e. a function of the two different specialization

patterns. The evolution of relative income through time, i.e. the convergence or divergence in

the international economy, will depend on how technological change redefines the location of

production: if the South expands the range of goods that it produces towards more dynamic

sectors (i.e. towards sectors with rising demand or productivity), there will be convergence.

Moreover, Ricardian models may link the Schumpeterian perspective, with its focus

on technology and structural change, and the Keynesian balance of payments constrained

growth models, that highlight the role of demand in sustaining growth. In the Keynesian

tradition, the specialization pattern is embedded in the income elasticities of demand for

exports and imports (McCombie and Thirlwall, 1994), thus being the link between

specialization patterns and demand implicitly present in these models. Ricardian models permit

to look at elasticities as the outcome of a process of structural change. The elasticities are then

expressed as a function of the parameters that define the relative rates of innovation and

technology diffusion in the international economy. In what follows a simple model of

convergence and divergence is presented.

a) The Ricardian Model and the Technological gap

The Ricardian model presented in this section is based on Dornbush et al (1977), and the

subsequent Neo-Schumpeterian revisions of Cimoli (1988) and Dosi et al (1990). We assume a

two-country model, where the North (N) and the South (S) differ in terms of their

technological development, being the North the more advanced country. Both countries

compete in the production of a large number of goods. Comparative advantage depends on

relative labor requirements defined as

z z

a

a

z

A

(

)

=

*

required to produce one unit of good z in the North and az are the hours per worker required to

technology. The subscript

z

∈

[ ]

0

,

1

descending order in terms of the comparative advantage of the South. The slope of the AA

curve reflects the rate at which the South looses its comparative advantage as the economy

diversifies towards sectors that are more technology intensive. The WW curve represents

relative wages W= w/w* between South (w) and North (w*).

Figure 1 shows the curve AA that represents relative labor requirements and the curve

of relative wages (WW), that both define the specialization pattern. Assuming that labor is the

only factor of production, the exchange rate is constant and equal to 1, and the goods market is

perfectly competitive, the South will produce the goods for which A>W. Thus, the South will

produce goods ranging from z0 to zc while the North will start producing goods from zc .

Figure 1. The Ricardian model

Note: The curve a a

A= * gives the relative labor requirements for producing one unit of good z in the North (a*) and the South (a). The curve

* w

w

W = gives the relative nominal wage between South (w) and North (w*).

It is assumed that the position of the AA curve depends on the technological gap

defined as _{= ≥1}

Ts Tn

G , where Tn and Ts are respectively, the technological levels of North

and South. The evolution of the technological gap depends on the relative rates of innovation

in the North and of technology diffusion towards the South. Following Fagerberg (1988) and zc

WW

z AA

A,W

Narula (2004), technological spillovers from North to South are assumed to be a linear

function of the inverse of the technological gap and the learning efforts in the South6:

(1) _

    

− − =

G

Gˆ ρ µ 1 1

Where

G G

Gˆ = D the proportional growth rate of the technological gap, ρ is the exogenous rate of

growth of knowledge in the North and µ is the domestic effort of the South to master Northern

technology. Both parameters are positive and constrained, so that µ > ρ > 0.

Although the model is aggregate and not micro-founded, the parameters that define

the evolution of the technological gap can be easily interpreted in the light of the

Schumpeterian literature on social capabilities (Abramovitz, 1986) and National Systems of

Innovation (Freeman, 1987). The parameters ρ and µ reflect the amount of resources allocated

to R&D and the institutional setting in which technological learning proceeds in both

countries. There is evidence pointing out that imitation does not occur automatically, but it is

the result of investments in learning that may vary considerably across countries (Cimoli and

Katz, 2002). These differences are reflected in µ. Alternatively, the parameters of the model

can be seen as the equilibrium result of a micro process in which economic agents choose to

become either innovators or bureaucrats, as in the Sah and Stiglitz (1988) model. In this case,

the South will reach an equilibrium featuring a larger proportion of bureaucrats than the North,

and this explains the asymmetry between North and South in terms of technological learning.

The stability of the technological gap implies that:

(2)

ρ µ

µ − =

⇒

=0 G* G

GD

Equation (2) gives the equilibrium value of the technological gap (G*) as a function

of the parameters that define the effort for innovation in the North and for imitation in the

South. It is straightforward that in equilibrium the gap will not be fully closed.

b) Productivity, wages and diversification

In what follows we address the role of technological gap in shaping the pattern of comparative

advantages. It is assumed that the technological gap affects the position of the curve AA, as in

the following equation:

6 _{A more realistic assumption would be that of a nonlinear relationship between technological spillovers and the}

(3) _{Az G bz} z

a z a

− − = = ( ) α β )

( ) ( *

Where α, β and b are positive parameters and α > β + b.

A reduction in the technological gap shifts the AA curve to the right, increasing the relative

labor requirements of the North for all goods z produced in the international economy. At this

point, assumptions about how the WW curve behaves are needed. To start, let us assume that

nominal wages are constant and therefore WW is horizontal – in other words, the relative

nominal wage remains constant as z increases7. Constant nominal wages can be justified

considering that the labor market in the “large” North is fairly resistant to changes in

competitiveness in the “small” South, while the abundant supply of labor in the South allows it

to boost employment rather than nominal wages when the economy grows8. Therefore:

(4) _{W h}

w w

= =

*

Where 0<h≤

α

β

technological gap.

(5)

b h G z_c=α−β −

If the technological gap is in equilibrium, then using equation (2) in (5) yields:

(5 )

b h zc

) (

) )( (

ρ µ

µβ ρ µ α

− − − − =

This equation gives the pattern o specialization as a function of the exogenous parameters. The

partial derivative of (5) with respect to µ is unambiguously positive, suggesting that the

Southern economy can diversify the economy by intensifying its imitative effort. On the other

hand, if the rate of innovation in the North suffers an positive exogenous shock, while the

imitative effort in the South stays still at about the same level as before, then the technological

gap and the number of goods produced in the North will expand at the expense of employment

in the South.

c) Specialization and the external constraint

Now, the model allows studying how specialization shapes North-South relative income levels.

This requires the study of the conditions necessary for international current account

equilibrium. Equilibrium in the international economy (assuming the absence of capital flows)

requires the current account of the two countries to be balanced. We assume that consumers

spend exactly the same percentage of their nominal income in each type of z. good. If the

7 _{On the other hand, as it will be discussed later, despite nominal rigidity, real wages may be increasing as a result of}

productivity growth in both in the North and in the South.

8 _{Under these assumptions, it is the level of employment in the South that endogenously adjusts so as to completely}

South produces goods for which 0

≤

≤

< z

≤

North and in the South, spend on goods produced in the South. If the exchange rate is fixed

and assumed unitary, then Southern exports will equal the Northern nominal income (y*) times

zc (Obstfeld and Rogoff, 1996, p.240). Symmetrically, Southern imports will equal the

Southern nominal income (y) times (1-zc) (the latter being the share of the nominal income of

the South that goes to buy Northern goods). Then, the current account equilibrium condition

requires that (1- zc)y = zc y*. The equilibrium condition in the international economy is as

follows:

(6) _*

z 1

z

c c _y y

− =

Equation (6) gives the nominal income in the South that is consistent with external equilibrium

as a function of the Northern nominal income and the degree o diversification of the Southern

economy (the number of goods whose production is located in the South in relation with the

total number of goods). This represents a Ricardian version of Thirlwall’s Law (McCombie

and Thirlwall, 1994, chapter 3), in which the elasticity parameters of the demand functions for

exports and imports have been replaced by parameters that reflect the production

diversification in the South. The economy will be constrained by external equilibrium, and if it

fails to pass the test of international competitiveness, the result would be either less

employment or lower wages. Since zc depends on the technological gap (equation 5), then

equation (6) can be written as:

(7)

) (

) ( * b uG

G u y

y

− =

where u(G) = α – βG – h, ie. the relative North-South nominal income is as a function of the technological gap. The impact of changes in the technological gap on relative nominal incomes

through deriving (7) with respect to G:

(8)

2 )) ( ( *) / (

G u b

b G

y y

− − = ∂

∂ β

And (8) is negative. Moreover, equation (6) states that nominal incomes will be equal in North

and South only in the special case in which the two countries produce exactly the same number

of goods, zc = ½.

d) Convergence and Divergence

By differentiating equation (6) with respect to time, it is possible to analyze how the evolution

(9) c c z z y y − = − 1 ˆ * ˆ ˆ

where cap on variables denote rates of growth (

y

ˆ

=

y

/

y

convergence to occur the South must be diversifying its economy. Moreover, as changes in

specialization respond to adjustment in the technological gap, it results that income and

technological convergence are interrelated, as the differentiation of (7) with respect to time

shows, see equation 10)9

(10) 2 )) ( ( *) ˆ ˆ (

* b u G

G b y y y y − − =

− βD

Equation (10) shows that convergence (

y

ˆ

−

y

ˆ

*

closes (GD < 0).

So far the discussion has focused convergence in nominal incomes. But, as according

to the model’s assumptions the principle of purchasing power parity (PPP) holds true in its

strongest version (the Law of One Price), the model’s conclusions can be extended to

convergence in real incomes as well., In effect, nominal wages are constant in both countries

and therefore they do not affect prices; consumers spend their nominal income in the same

goods, and in exactly the same proportions; perfect competition assures that productivity

growth fully translates into lower prices; and the exchange rate is constant. As a result, at any

moment inflation rates are equivalent in the two countries, and the evolution of the

North-South relative income in nominal terms will be the same as the evolution of relative income in

real terms:

(11)

y

ˆ

−

y

ˆ

*

=

y

ˆ

−

y

ˆ

*

+

(

p

ˆ

*

−

p

ˆ

)

p

ˆ

=

p

ˆ

*

(12) c c R R

z

z

y

y

y

y

−

=

−

=

−

1

ˆ

*

ˆ

ˆ

*

ˆ

ˆ

where the subscript R indicates that the variable is expressed in real terms10.

e) Flexible Relative Nominal Wages

So far nominal wages were assumed constant and changes in nominal income reflected

adjustments in employment in the South. Let us assume now full employment both in the

North and in the South and suppose that relative nominal wage adjusts to respond to changes in

international competitiveness. Since labor is the only factor of production, its amount is

9 _{where dots on the variables denote derivates with respect to time (i.e.} dt dG GD = ).

10

constant, the followings hold: y = wL and y* = w*L*. Therefore, the current account

equilibrium condition defined by equation (6) can be written as follows:

(13) _{* *}

1 z w L

z wL

c c

− =

The value of zc as a function of G derives from equations (3) and (13) and the equilibrium

condition A=W=

*

w

w

(given L and L*):

(14)

b

G b G f G f z_c

2

) ( 4 )] ( [ )

( 2 _{α β}

− − −

=

Where

f

(

G

)

=

α

−

β

G

+

b

+

c

Although equation (14) is not as simple as equation (5), it does not affect the basic model’s

results. In particular, relative income levels continue to be described by equations (6) and (7),

while the rate of nominal and real convergence are described by equations (9) and (10). The

difference is that, in this case, convergence is related to changes in relative nominal wages that

endogenously respond to the diversification in the South (while employment remains

constant). Therefore:

(15)

c c

z

z

w

w

y

y

−

=

−

=

−

1

ˆ

*

ˆ

ˆ

*

ˆ

ˆ

If one makes the additional assumption that the North is big enough so as to remain unaffected

by structural change in the South, then nominal wages in the North will remain constant and

the effects of new policies will be fully translated into an increase of nominal wages in the

South. In this case, the mechanism of convergence will be a reduction in the gap between real

wages in North and South. The Ricardian model gives rise to two testable predictions. These

predictions stem from equations (6), (7), (9) and (10) and can be summarized as follows:

o GDP per capita growth will be positively related to technological

capabilities, which are represented by the parameter µ;

o GDP per capita growth will be positively associated with the diversification

of the export structure towards technology-intensive sectors.

f) Empirical Evidence

The empirical evidence that follows is based in econometric estimations for two different panel

data: i) a two-year panel data (using the years 1990 and 2000) and ii) a 14-year panel data

(including data for the whole period 1990-2003). The two-year panel data assesses the role

played by National Innovation Systems in economic growth. The 14-year panel data tests the

The ArCo index, based on by Archibugi and Coco (2004), is proxy for technological

learning. This Index is as a linear combination of three indicators related to different

dimensions of NIS: (Ia) creation of technology; (Ib) technological infrastructure development

and (Ic) human capital formation efforts11. As mentioned, the ArCo index is available only for

two years, 1990 and 2000.

The second panel data (14-year series) 12 helps to study the role of international

specialization using terms of trade, participation of agricultural raw materials in total exports13

and participation of high-technology exports in total exports14 as proxies for the degree of

export diversification. Terms of trade are equal to the capacity to import minus export of goods

and services in constant prices. A first econometric tests is run on the following equation:

(17)

y

ˆ

=

α

+

β

ArCo

+

ε

Where

y

ˆ

for Ordinary Least Squares (OLS), random and fixed effects estimations. Estimated parameters

suggest that the Schumpeterian approach to Ricardian model is consistent with empirical

evidence. In all cases the coefficient of the technological learning index is positive and

significant. As stressed by the Schumpeterian literature, catching-up in the international

economy in terms of technology and real incomes is a function of what has been broadly

defined as the national innovation system.

Table 1. Economic Growth and Technological Capabilities

Variables / Estimation Pooled Regression OLS

Fixed Effect Random Effect Fixed Effect with time dummies Technological Learning

(Arco)

5.44** (0.35)

3.46** (0.37)

4.73** (0.25)

4.36** (0.61)

R2 0.71 0.57 0.63 0.58

Observations 174 174 174 174

Notes: ** significant at 5%

The Balance-of-Payments constrained approach suggests, in turn, that technological

learning affects growth by allowing for the diversification of the export structure towards more

11 _{The variable (Ia) includes number of patents per capita obtained in the United States and per capita number of}

scientific papers published by the residents of the country; (Ib) is a combination of three variables that seek to capture the development of the technological infrastructure: internet penetration, telephone penetration and electricity consumption; and (Ic) is a proxy for investment in human capital, including mean years of schooling, tertiary science and engineering enrolment, and the literacy rate.

12 _{Data were obtained from UN COMTRADE Database and World Bank (2005).}

13 _{Agricultural raw materials comprise section 2 (crude materials except fuels) excluding divisions 22, 27 and 28}

(crude fertilizers and minerals excluding coal, petroleum, and precious stones and metal ores and scrap) of the Standard International Trade Classification (SITC).

14 _{The high-technology exports comprise exports from sectors that are intensive en R&D, namely aerospace,}

dynamic sectors. In other words, the demand-side must not be neglected. To test this

hypothesis, the following econometric model is estimated:

(18)

y

ˆ

=

α

+

β

PS

+

ε

Where PS is the vector of the three variables used as proxies for the dynamism of the

specialization pattern.: terms of trade, participation of agricultural exports in total exports and

participation of high-technology exports in total exports. We suppose that high-tech exports

represent dynamic items in international trade, while agricultural exports tend to generate less

technological externalities and also face a lower income elasticity of demand. And the

econometric results are consistent with the hypothesis that specialization matters for growth.

All coefficients are significant and have the expected signs (see Table 2).

Table 2. Economic Growth and Specialization

Variables / Estimation Fixed Effect

(1)

Fixed Effect

(2)

Random Effect

(3)

Random Effect

(4)

Term of Trade 0.017***

(0.014)

0.017 (0.027)

0.009 (0.027)

0.010 (0.029) Agricultural Exports -0.011

(0.09)

-0.10 (0.08)

-0.11** (0.04)

-0.12** (0.03) High Tech Exports 0.037**

(0.012)

0.038 (0.019)

0.034** (0.011)

0.033** (0.010)

R2 0.12 0.24 0.13 0.16

Obs. 770 770 770 770

Notes: (2) Estimation with time dummies. (4) Estimation with regional dummies. ** significant at 5%; ** * significant at 10 %.

These econometric estimations confirm the predictions of the Ricardian model

previously presented15.

15 _{However, future research based on a wider panel data would be beneficial. The authors are currently working on}

2

Structural change and technological capabilities

This section compares empirical evidence on the Latin American technological and structural

change in a comparative perspective during the last 30 years focusing on production structure

and exports’ dynamism. The analysis is based on a sample composed by 17 countries; seven of

which are from Latin America and represent more than 90% of Latin America’s GDP. The

analysis is based on the following variables: i) structural change, measured as the share of the

value added of R&D intensive sectors in the total manufacturing added value, ii) R&D

expenditures as % of GDP, iii) relative labor productivity in the manufacturing industry with

respect to the US; iii) accumulated number of per capita patents registered in the USPTO, iv)

changes in the international specialization pattern, measured by the Adaptability Index; and v)

economic growth16. Table 3 presents the correlation matrix between these variables.

Table 3. Matrix of Variable Correlations

Variables Structural Changea

Productivity

Gapa R&D Patents

Adaptability Index a

GDP Growth Structural

Changea 1 0.63 0.52 0.36 0.63 0.70

Productivitya Gap 1 0.44 0.26 0.53 0.31

R&D 1 0.89 0.07 0.27

Patents 1 0.09 0.18

Adaptability

Index a 1 0.46

GDP Growth 1

Source: Own elaboration based on Annex 2. d _{Variation rates.}

According to simple correlations structural change appears as highly correlated with

GDP growth. At the same time, the intensity of structural change is closely related with R&D

expenditure (relative to GDP) and the Adaptability Index. This suggests that the economies

that increased the share of R&D intensive sectors in total manufacturing value added increased

and that invested the more in innovation, grew faster.

Correlations between technological variables and economic growth are not as high as

those between growth and the variables that grasp the characteristics of the production

structure. This suggests that the effects of learning and innovation on growth are mediated by

structural change. In what follows we give evidence of the asymmetries in structural change

and technological efforts in Latin America with respect to emerging or frontier’s countries.

Manufacturing industry can be classified in three different categories: natural resource

intensive, labor intensive and R&D intensive activities (see Annexes 2 and 3). The US,

Finland, Korea, Malaysia, Singapore and Taiwan show the highest increase in the share of

R&D intensive sectors in total manufacturing value added between 1970s and 2000. At the

same time, almost all countries saw, during the same period, a reduction in the participation of

labor-intensive activities in total manufacturing value added. Latin America, On the other

hand, shows a quite stable production structure.

Figure 2 portrays the variation in the participation of R&D intensive activities in

manufacturing value added between 1970 and 2000. Figure 2a compares Latin America with

US, Norway, Finland and Australia. The weight of R&D intensive sectors increased in mature

economies, like US and Finland from 40% to 60% and 23.8% to 46.4%, respectively. On the

other hand in Latin America the participation of the R&D intensive sectors only increased

from 21.1% to 28.3%. Figure 2b highlights the technological leadership of Asian countries

where the participation of R&D sectors reaches 63%, 65.4% and 55.3% of total manufacturing

value added in Korea, Singapore and Malaysia, respectively. Figure 2c helps to identify

heterogeneity within Latin American countries. Between 1970 and 2000 the share of R&D

sectors in Argentina, Colombia, Peru and Uruguay decreased, while it increased in Brazil and

Figure 2. Participation of R&D intensive sectors by regions and countries, 1970 and 2000

(Percentages)

a) b) c)

Figure 3 looks at structural change from a different perspective. The production

structure composition is measured in the Y-axis, where the cumulative share of natural

resource intensive, labor intensive and R&D intensive activities is measured17. The X-axis

measures labor productivity. Shifts along the X-axis reveal productivity changes, while

movements along the Y-axis measure variations in the share of each kind of activity within

total value added, i.e. structural change.

Figure 3a) compares Latin America with the US. The increase in productivity

achieved by the US is much higher than that of Latin America. Differences are not limited

to productivity; they also concern the production system. In 2000 in the US R&D intensive

activities represented 60% of the industrial value and were, at the same time, the most

productive activities. This is not the case for Latin America. There, natural resource

intensive activities are the more productive ones and those that contribute the most to the

generation of total manufacturing value added. Although in some Latin American

countries the participation of R&D intensive activities increased, the intensity of this

change is clearly less marked than the one that occurred in US and in catching up

economies like the Asian ones.

The increasing share of R&D intensive sectors in manufacturing matched with

productivity growth is the source for a virtuous process that generates and diffuses

knowledge. Firms and sectors interact absorbing products and improving their production

processes with greater technological content (Dalum, Laursen and Verspagen, 1999).

Abramovitz and David (2001), for example, explain the variation in the pattern of growth

in the US between 1800 and 1900 as a result of the modification in the sources of labor

productivity growth; the importance of physical capital and tangibles was progressively

less relevant in accounting for growth that the role of intangibles18. The US shifted from

natural resource intensive specialization pattern to a pattern based on creation and

diffusion of knowledge and intangibles mostly supported by the accumulation of

technological and organizational capabilities.

The relevance of the specialization pattern in determining growth also finds

empirical support in the analyses of cases of Korea, Singapore, Taiwan and Hong Kong

(Nelson and Pack, 1999). These authors demonstrate that the higher growth rates in these

countries derived from a substantial modification of their production structure due to an

increase in the participation of R&D intensive activities in manufacturing and to the efforts

directed to augment the capacity to gradually diffuse knowledge.

Figures 3b) and 3c) compare structural change in Korea with Brazil and Mexico.

Both Latin American countries present a modest performance compared to Korea.

17 _{Obviously the cumulative shares should sum 100, and the relative participation of each kind of activity can be}

obtained by difference in the Y-values.

18 _{Abramovitz and David interpret economic growth in the US throughout the last two centuries as the result of}

Nevertheless, the industrial trajectories of Brazil and Mexico imply different strategies. In

Brazil, market size and the active policies of the seventies supported the development of

quite remarkable R&D intensive industries (Ferraz et al, 2004), whereas in Mexico

attraction of foreign direct investments (FDI) and the integration to global productive

systems, especially with the US, was the dominant aptitude (Capdevielle, 2005; Mortimore

and Vergara, 2003).

On the other hand, the Korean development strategy was deliberately oriented to

the creation and accumulation of technological capabilities; the first industrial

development plan dates back to 1962. Korean structural change resulted from an

intentional strategy to foster a gradual industrialization that aimed to create the technical

capabilities and to promote innovation privileging knowledge intensive industries. A

selective combination of industrial and commercial policies was used to promote this

knowledge-oriented industrialization. Figures 3b) and 3c) show the transformation of the

Korean production structure and its gains in labor productivity19.

Figure 3d) present the cases of Chile and Finland. In both countries, at the

beginning of the seventies natural resource intensive activities dominated the production

system, representing 61.7% of the Chilean manufacturing value added and the 52%of the

Finnish one But in the decades after, the two countries followed different industrial

trajectories. Finland experienced a radical technological upgrading of the production

structure by increasing the participation of R&D intensive sectors from 23.8% to 46.4, and

maintaining, at the same time, a significant share of natural resource intensive activities

(these activities accounted for 40.4 % of total manufacturing value added in 2000).

Conversely, Chile reinforced its specialization pattern in natural resources. In 2000, natural

resource intensive activities accounted for 67.5 % of total manufacturing value added,

while R&D intensive activities only represented the 12 %.

19 _{See Krugman, 1994 for a discussion on the relative importance of capital accumulation and Nelson and Pack,}

Figure 3. Structural Change and Productivity, 1970-2000

(Percentages and dollars)

a) Latin America and US b) Brazil and Korea

0.0 25.0 50.0 75.0 100.0

0 20000 40000 60000 80000 100000 120000 140000 160000

Labor productivity (1985 US$ dollars)

Indus tr ial s h a r (P erce n tag es)

Natural resources intensive Labor intensive R&D intensive

Latin America 2000 USA 1970

Latin America 1970

USA 2000 0.0 25.0 50.0 75.0 100.0

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000

Labor productivity (1985 US$ dollars)

Indus tr ia l S ha r (P ercen ta je s)

Labor intensive "R&D intensive Natural resources intensive

Brazil 2000 Brazil 1970

Korea 1970 Korea 2000

c) Mexico and Korea d) Chile and Finland

0.0 25.0 50.0 75.0 100.0

0 5000 10000 15000 20000 25000 30000 35000 40000 45000 50000

Labor productivity (1985 US$ dollars)

Indus tr ia l s h ar (P er ce nt ages )

Labor intensive R&D intensive Natural resources intensive

Mexico 2000 Mexico1970

Korea 1970 Korea 2000

0 10000 20000 30000 40000 50000 60000

Labor productivity (1985 US$ dollars)

In d u st ri a l sh ar (P er cent aj es)

Labor intensive R&D intensive Natural resources intensive

Chile 2000 Chile 1970

Finland 1970 _{Finland 2000}

There is an issue that has been implicitly involved in our discourse: the role of

R&D spending. Actually, countries that experienced successful structural change showed,

simultaneously and not surprisingly, increasing R&D expenditures. This is the typical case

of Finland and Southeast Asian countries. This twofold process of changing the

composition of the production structure and the raise in R&D expenditure stemmed, in

general, from the application of a set of long-term coordinated policies directed at the

accumulation of technological capabilities. Industrial and trade polices in Korea promoted

a gradual upgrading in domestic technological capabilities and in Finland subsidies to

technology intensive activities supported the structural change. In general, those countries

in their period of industrialization experimented a sort of selective State intervention that

fostered the reorientation of the production structure towards R&D intensive sectors (Kim,

1993; Ormala, 2001). Figure 4 shows a cross-country comparison between production

structure and R&D expenditure. Most Latin American countries are concentrated at the

bottom of the curve and are characterized by a low participation of R&D intensive sectors

and by a reduced R&D expenditure (around 0.5% of the GDP).

Figure 4. R&D Intensive Sectors and R&D (Percentages)

Finland USA

Korea Singapore

Taiwan

Australia Norway Malaysia

Peru UruguayChile

Argentina India Brazil Philippines

Mexico

Colombia

y = 13.0Ln(x) + 40.6 R2 = 0.56 0.0

20.0 40.0 60.0 80.0

0.0 0.5 1.0 1.5 2.0 2.5 3.0 3.5 R&D/GDP1996-2002

(Percentajes)

R

&

D

in

te

n

siv

e

s

e

c

to

r

(P

er

cent

a

ges)

Source: Own elaboration based on Annex 2.

3

Trade and growth: the reinforcement of international

specialization

Obviously the kind of international specialization is not independent from the

characteristics of the production structure and the technological capabilities. The open

economy setting on the one hand, favored the dynamics in the production structure

presented in the previous section and on the other hand, induced the reinforcement of Latin

one proper of the Mexican Gulf and the other specific to Southern Cone. Mexico and

Central American countries integrated their manufacturing and assembly activities into

global chains, basically offering to Northern economies cheap labor (ECLAC, 2002;

Cimoli and Correa, 2005; Mortimore and Peres, 2001; Reinhardt and Peres, 2000). On the

other hand, Southern Cone countries (like Argentina, Brazil, Chile and Uruguay)

reinforced their specialization in natural resources and standardized commodities. Plants in

these industries are now highly capital-intensive but produce scant domestic value added.

Changes in the dynamism of international specialization can be described by the

evolution of the Adaptability Index (see Annex 2). When this index is greater than one the

participation of dynamic products (in international markets) exceeds the participation of

stagnant products (sectors whose international demand grows at lower rates than the world

average). A virtuous international specialization usually implies an increase in the

Adaptability Index through time.

Figure 5 shows the relation between the participation of R&D intensive sectors

and the Adaptability Index. Countries specialized in technology intensive sectors show

higher values of the Adaptability Index (Southeast Asia and the US), whereas those

specialized in segments of medium and low technological activities are characterized by a

reduced index value (like Latin America excluding Mexico due to the maquila industries).

In this respect, let us compare the peculiar cases of Mexico and the Philippines with Korea

and Malaysia.

Figure 5. R&D Intensive Sectors and Adaptability Index

(Percentages)

Argentina Chile Colombia Peru

Uruguay

Australia Norway

India Brazil

Finland Mexico Philippines

Taiwan

USA Korea Malaysia

Singapore

y = 0.19e0.04x R2 = 0.48 0.0

2.0 4.0 6.0 8.0

0.0 10.0 20.0 30.0 40.0 50.0 60.0 70.0 R&D intensive sectors

(Porcentajes)

A

d

a

p

ta

b

ili

ty

I

n

d

e

Source: Own elaboration based on Annex 2.

Mexico, Malaysia and Korea show similar adaptability indexes, but they differ in

manufacturing value added is higher in Korea and Malaysia than in Mexico. We can argue

that the Mexican adaptability is explained by exports originated from assembling activities

that require low R&D expenditures and that generate weak spillovers effects. Capdevielle

(2005) indicates that in Mexico the maquila industry has neither increased its productivity

nor displayed strong linkages with the rest of the economy; in fact an increasing

integration with international market does not imply increasing dynamism in all

technological activties20. Conversely, in Korea and Malaysia the most dynamic exporting

sectors are those with the highest share in total manufacturing value added, thus revealing

stronger linkages between exports and domestic production.

Australia and Norway are other two peculiar cases. These countries show low

adaptability but high R&D expenditures in terms of GDP. Their scant adaptability suggests

that R&D expenditures have reinforced the external insertion in natural resource intensive

sectors, which in general tend to be less dynamic. Philippines, in turn, stands out as a

singular case due to the high degree of adaptability and the reduced participation of R&D

intensive sectors in the production structure (28,5%). As in Mexico, the increase in the

share of R&D intensive activities derives from FDI and assembly activities. These

differences in countries’ performances may help to identify different typologies of

international specialization, according to the participation of natural resource intensive

activities in total exports and R&D efforts.

Table 4. Trade and growth: a typology based on factors endowment or technological capabilities: A typology

Natural resources intensive sectors a R&D intensive sectors b High R&D Australia

Norway

Korea, Taiwan, United States, Finland, Singapore

Low R&D Argentina, Brazil, Chile, Colombia, México, Peru, Uruguay, Philippines,

India

Malaysia

Source: own elaboration.

a _{Principal industrial activities in these countries are natural resources intensive, see Annex 2.} b

Principal industrial activities in these countries are R&D intensive, see Annex 2.

According to international specialization patterns and technological efforts

countries can be classified in terms of two basic types of growth strategies. The first one is

based on taking advantage of the economic rents conferred by a privileged access to

abundant factors of production, namely cheap labor or natural resources endowment.

Countries that follow this strategy will tend to concentrate their efforts in maintaining or

20 _{Ciarli and Giuliani (2005) reach to similar conclusion for the case of Costa Rica. The diversification of exports}

extending their participation in natural resources intensive sectors. In some cases,

especially when natural resources are abundant but labor is scarce, significant

technological efforts may be required to boost labor productivity. Some production

linkages can arise spontaneously, but if those countries fail to actively encourage structural

change it is likely that their specialization pattern will not automatically create the

incentives to to shift towards more sophisticated technological production stages and

activities.

The second type of strategy is based on trying to extract rents from knowledge,

which must be continuously recreated as new paradigms arise and/or imitators gradually

erode the dominant position reached by the innovator. Dynamic competitive advantages

predominate in this type of strategy, as described by Schumpeter. Although the initial

advantage can be based on some abundant factor, structural changes in the production

system is continuous and it pushes for an increasing participation of R&D intensive

activities within manufacturing.

In the ling term, the strategy based on fostering R&D intensive sectors induces

higher rates of growth than the strategy of creating economic rents out of the relative

abundance of natural resources or cheap labor. However, if a country benefits from natural

resource abundance, this does not necessarily implies that the dutch disease or any other

“natural resources curse” will affect it.

Societies face different options and they can choose between a set of possible

growth trajectories. This choice– which has to do with complex variables related to

institutions and political economy and their interplay with the economic structure and the

dynamics of technological progress at each point in time - is more important in the long

term than initial endowments. Abundance of resources can sustain growth without

significant efforts for learning during a certain period, but in the long term economic rents

derived from these resources tend to be eroded. Growth is sustainable only if backward

and forward linkages are created, as it was anticipated by Hirsmann (1977) and by the

“staples theory”, and if the initial advantage is used to build up technological advantages.

4 Conclusions

A North-South Ricardian growth model in which the specialization pattern depends on the

technological gap is an interesting framework for discussing convergence and divergence

between central and peripheral countries. Convergence requires deep and well-built local

efforts to foster learning and the development of technological capabilities in the South.

This strengthening of National Innovation Systems aims at reducing the technological gap

and diversifying the export structure towards more dynamic secors in terms of

technological paradigms and demand growth. Assuming that comparative advantages are a

and catching-up in the South, the model lead to a set of results that are consistent with the

Schumpeterian hypothesis that links growth to technological capabilities. And consistency

extends also to the Keynesian (demand based) perspective in which growth requires the

transformation of the specialization pattern in order to ease the balance of payments

constraint.

Learning and innovation reshape international competitiveness and allow

countries to exploit the opportunities of international trade and growth. Moreover,

technological efforts are mediated by the transformation of the production structure. A

structural change that promotes sectors that create and diffuse technology allows to capture

the opportunities of international demand dynamism. Convergence requires that the

economies are able to transform their production structure, and look for rents generated by

knowledge and learning activities. In that transformation, R&D intensive sectors must

reach an increasing weight in the industry being a source of externalities and spillovers.

The existence of abundant natural resources or cheap labor can sustain high rates

of growth during a certain period without requiring high R&D investments. However,

changes in the international economy and demand patterns are likely to expose countries

pursuing this strategy to vulnerabilities, because, in the long term, this behavior reduces

the structural capacities of capturing the opportunities of technological progress. Actually,

rents derived from knowledge, which are cumulative by nature, can be continuously

re-created, redefining the conditions for allowing entrance in new markets. On the other hand,

when rents are purely based on the relative abundance of resources, the capacities to

induce or respond to shocks and changes is reduced, since the country basically lacks the

technological capabilities necessary to readapt the production system to changing contexts.

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